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October 19, 2006

The Insights of Swing Trading

by Scott Hoffman, Senior Broker & CTA

S&P

Stocks are in the process of coming to grips with higher interest rates and inflation fears on one hand, and on the other, Q3 earnings, which are starting out favorably.  As we move farther into the earnings season, expect a rally (assuming continued favorable news flow) as moderating energy prices and a perceived growing ability to pass price increases along to end users are aiding a number of market sectors.  The key to recovery will be the ability of S&Ps to regain the psychologically important 1200 area.  A move over 1200 should allow a rally toward 1220; an inability to do so could lead to a retest of support around 1170.  Longer term I think the market is going to run into problems in a rising interest rate environment.

Bonds

The Treasury market continues to be under pressure as traders are concerned that the Fed remains behind the curve on inflation.  There appears to be little support for Treasuries, as traders continue to price in higher interest rates and budget deficits.  The break under the August low at 113- 12 should keep the pressure on bonds, and they were unable to regain that level last Friday.  The next major downside objective is the 2005 low around 109-00; only a move above trendline resistance (currently around 113-16) negates my bearish outlook.

Dollar

The dollar is being pulled in two directions.  Rising bond yields and hawkish Fed rhetoric are aiding the dollar, as are concerns over EU reform prospects and diminished expectations for a revaluation of the Yuan.  On the other hand, the trade is worried about both US growth prospects; traders are waiting for the numerous speeches by Fed officials this week, and the Beige Book, due out on Wednesday.  Tuesday saw positive a TICS (Treasury International Capital Data) report, which showed continued strong demand for US assets, which aided the dollar, and led to a downside breakout in the yen.  Clearing the yearly high at 9030 in the December Dollar Index is the key to a further advance for the dollar.

Gold

The gold rally has stalled as the dollar staged a rally toward the year’s high, and was pressured by a decline in energy prices.  I’m still bullish on gold, but I think it will pay to be patient about going long.  Look for a break under $470 to lead to a break to the lower $460s, at which point I'll be looking to re-buy this market.  I still think that $500 is feasible as a price target by the end of the year.

Silver

Last week’s break to old resistance at $7.65 met with strong buying, and leaves silver in a position to test the yearly high at 795.5.  Clearing this important psychological support should lead to another rally, and a break below last week’s low at $7.65 could lead to a break toward longer term support at $7.30.

Copper

Copper prices roared back after a sharp break last week.  Last week’s break occurred as prices broke a steep uptrend line, and Monday’s trade approached the contract high at 183.80.  In the short run, the ability or inability of copper to take out the contact high, avoiding a double top, remains the key to price action.  Copper remains a big focus of commodity “value" investing, so there is a strong “buy the breaks" mentality in copper.  Given this, expect a break back to longer term support around $1.75 to be well supported.

Sugar

Last week’s failure to take out the 12 cent area brought in producer selling in sugar, as did the inability of the market to regain the Sept/Oct uptrend line.  We cleared out of our long positions last week, and in the short term I think a case could be made for either side of the market.  If the newest hurricane misses sugar producing areas, I'd look to short the market as it drops through Monday’s 1145 low.

Cocoa

After a rally caused by concerns of a political flare up in the Ivory Coast, cocoa prices staged an abrupt reversal Monday.  This leaves cocoa vulnerable to a retest of last week’s low at 1347.  I think fears of renewed violence in the Ivory Coast should leave the market well supported on breaks, but I wouldn’t be aggressive about going long until cocoa can break above resistance at the 40 day moving average (currently 1410).

Coffee

The coffee market saw a sharp rally on Monday, vaulting over the critical 100 area over fears about Hurricane Wilma, which may be headed to Central American coffee growing regions.  The pattern from late last week was a bull flag, and as long a prices stay over 100 expect a rally toward the September high at 115.

Live Cattle

We had been looking to sell cattle when the September/October downtrend line was broken, and we saw a sharp break Friday and Monday as funds ran for the exits.  Fundamentally, the rally was derailed by a weaker cash market and concerns over potential Canadian beef exports to Japan.  Last week’s sell recommendation at 9085 in the December worked well, with my first downside objective is the 40 day moving average, which comes in at 8817.

Lean Hogs

The break in hogs started last week, as pork bellies topped; then Dec hogs broke an uptrend line on Wednesday.  We shorted the hogs last week as the trendline was broken and MACD gave a bearish crossover.  Last Friday started another break down, as the market has a downside breakout from a narrow range day pattern.  Hogs broke through my first downside objective at 6050 and appear headed toward a 50 percent retracement level at 5890.

Soybeans

Beans rallied last week in anticipation of the usual post-harvest rally, popping over the 40 day moving average at 5.84.  We were long beans going into last week’s crop production numbers, and took profits after the report.  Monday’s trade saw a breakout of a narrow range day setup, but was unable to clear psychological resistance at $6.00.  Clearing 6.00 remains they key to further upside, with support at 5.84.  A move over 6.00 could take beans to 6.10 then 6.25; a move under 5.84 could take them down to fill in the recent gap, which runs down to 566.50.

Wheat

Last month’s sharp export led rally in the wheat is in the process of coming undone, as exports slowed with the price rise and the market faces an impending Southern Hemisphere harvest.  We liquidated longs last week as the market made a double top around 3.50, and Dec Wheat appears ready to at least test support around 3.30.  MACD is posting a bearish crossover, indicating more downside is likely.  A breach of 3.30 support could take wheat down to the September lows around 3.15.

PLEASE NOTE THAT THERE IS AN INHERENT RISK OF LOSS ASSOCIATED WITH OPTION CONTRACTS.  OPTIONS TRADING IS NOT SUITABLE FOR ALL INVESTORS.  OPTIONS CAN AND DO EXPIRE WORTHLESS.  IF YOU PURCHASE A COMMODITY OPTION, YOU MAY SUSTAIN A TOTAL LOSS OF THE PREMIMUM AND OF ALL TRANSACTION COSTS.